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COVID-19 has been declared a Public Health Emergency of
International Concern by the World Health Organisation
(WHO).1 There is now a global reach of the
virus.2 What could that mean for existing
obligations under contracts governed by laws of English common law
jurisdictions such as England & Wales, Hong Kong, Australia, or
Singapore?

Contractual obligations in the event of a pandemic

As the global impact of the outbreak worsens, causing disruption
to international trade and other commercial activities, the risk of
businesses being unable to perform their contractual obligations
increases. When a breach of contract arises, the innocent
party would normally sue the defaulting party for
compensation. However, if the failure to perform the contract
is caused by a pandemic, the defaulting party might be relieved by
invoking the following as a defence:

the pandemic has triggered the
force majeure clause under the contract; or

the contract has been frustrated by
the pandemic,

such that the innocent party will not receive compensation for
non-performance of the contract.

The scope and operation of a force majeure clause in
the event of a pandemic

The purpose of a force majeure clause is to relieve the
defaulting party (or all parties) from performing the contract or
the remainder of the contract when an exceptional event or
circumstances beyond the reasonable control of the parties prevents
or hinders the performance of the contract. Sometimes, a
force majeure clause does not seek to relieve the parties
from the contract entirely, but only suspend its performance until
after that event or circumstances.

There are two ways in which a force majeure clause
could cover a pandemic:

the contractual definition of
a force majeure event expressly includes a
pandemic – adding a pandemic to the list of
force majeure events can ensure clarity as to whether a
viral outbreak would trigger a force majeure clause in a
contract. In that situation, if the WHO or a state agency
declares the outbreak to be a pandemic, there will usually be no
question that a force majeure event has occurred; or

the force majeure
clause covers extraordinary events or circumstances beyond the
reasonable control of the parties
– such general, catch-all wording may be
sufficient if it is determined that the factual circumstances
caused by the pandemic are beyond the reasonable control of the
parties.3 It is also possible that
the consequences of or relating to a pandemic (e.g. government
policies, travel restrictions, etc.) could themselves amount to
aforce majeureevent if they are beyond the
reasonable control of the parties.

Whether a force majeure clause would apply depends on
the wording regarding the triggering event. If the clause
provides that the triggering event must
“prevent” the performance of the contract, the
party relying on it would usually need to prove that the
performance is physically or legally impossible. The fact
that the event has made the performance difficult or unprofitable
is unlikely to be sufficient to trigger a typical force
majeure clause.

On the other hand, if the clause provides that an event that
causes the performance to be “hindered” or
“delayed” could trigger the clause, it is
likely to be adequate to demonstrate that the performance is
substantially more onerous. However, an increase in the cost
of the performance alone is still unlikely to be
sufficient to trigger the force majeure clause.

Furthermore, the party invoking the force majeure
clause should demonstrate that it has taken all reasonable steps to
mitigate the event as well as its effect on the performance of the
contract (e.g. identifying alternative sources or keeping a
sufficient reserve of materials that could become limited in
supply).

It is worth noting that:

The China Council for The Promotion
of International Trade has announced that it would issue force
majeure certificates to any qualifying applicants.4
For example, it has recently issued such a certificate to an
auto parts manufacturer based in Huzhou.5

The Indian Ministry of Finance also
declared that any solar project developers that could not perform
their contractual obligations by relevant deadlines due to the
outbreak of COVID-19 can invoke force majeure
clauses.6

These type of announcements are likely to encourage parties to
rely upon force majeure clauses, but it is ultimately a
matter for construction under the contractual governing law.

Frustration of contract by a pandemic

A contract is frustrated when there is a supervening event that
changes the nature of the outstanding contractual rights and/or
obligations to the extent that the parties could not have
reasonably contemplated such change at the time of the execution of
the contract.7 In that situation, a party may be
excused from performing the contract because the primary purpose of
entering into the contract and its performance have been rendered
radically different.

The change in circumstances must be attributable to an external
event that is not caused by the default of the party relying on it.
In that situation, the force majeure clause may be
triggered if the contract does not make sufficient provision for
such supervening event. Therefore, if a COVID-19 pandemic
fundamentally changes the principal purpose for the parties to
enter into the contract such that its performance is radically
different from what could have originally contemplated, the
defaulting party may be excused from performing the frustrated
contract.

Frustration of contract should only be invoked in the event of a
pandemic if the contract does not contain a force majeure
clause or the clause does not cover a pandemic as discussed
above. The scope of the application of frustration is narrow;
this is because the courts would not invoke the doctrine of
frustration lightly “to relieve contracting parties of
the normal consequences of an imprudent commercial
bargain”.8 If the contract already
provides for a pandemic event (under a force majeure
clause for instance), such express provision would usually prevent
the contract from being frustrated.

Frustration of a contract would not occur merely because the
event has made the performance difficult, more costly, or
onerous. Nor would a contract be frustrated simply due to an
unforeseeable event that did not otherwise change significantly the
outstanding contractual rights or obligations from what the parties
could reasonably have contemplated at the time of the execution of
the contract.9 When a contract is frustrated, that
would be the end of the contract: it is not possible to suspend the
performance of a frustrated contract only for the duration of the
frustrating event (unlike some force majeure clauses).

Other considerations

Businesses should identify and review key contracts in order to
assess the risk of contractual breach by them and/or their
counterparties due to the COVID-19 pandemic. They should then
devise pre-emptive measures, such as identifying alternative
sources of key materials, so as to minimise the possible impact of
the pandemic to the extent they are reasonably foreseeable.

Where there is a risk of failure in the performance of
contracts, businesses should consider the ramifications of
non-performance clauses within those contracts, such as liquidated
damages clauses, under which the amount of compensation for
non-performance has been predetermined and agreed by the parties
when entering into a contract. If a liquidated damages clause
is considered enforceable, steps should be taken to minimise the
likelihood of triggering the clause, or preparations should be made
in terms of enforcement of such clause.

9. Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD
754: it concerns the impact of a 10-day isolation order due to the
SARS outbreak on a 2-year tenancy agreement of an apartment in Amoy
Gardens, the first residential location of a SARS community
outbreak in Hong Kong in 2003.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

The Luxembourg law on the exploration and use of space resources of 20 July 2017 entered into force on 2 August 2017 and placed Luxembourg among the most innovative space-oriented nations in the world.

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